Good Morning Traders,
As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Up at 80.825, the Dec US Dollar is up 168 ticks and is trading at 80.825.
Energies – January Oil is up at 92.86.
Financials – The December 30 year bond is down 21 ticks and trading at 131.18.
Indices – The December S&P 500 emini ES contract is up 2 ticks and trading at 1804.50.
Gold – The December gold contract is trading down at 1237.90 and is down 127 ticks from its close.
Note: The front month for crude is now January "14.
Initial Conclusion: This is not a correlated market. The dollar is up+and oil is up+ which is not normal and the 30 year bond is trading lower. The Financials should always correlate with the US dollar such that if the dollar is lower then bonds should follow and vice versa. The indices are higher and the US dollar is trading higher which is not correlated. Gold is trading lower which is correlated with the US dollar trading up. I tend to believe that Gold has an inverse relationship with the US Dollar as when the US Dollar is down, Gold tends to rise in value and vice-versa. Think of it as a seesaw, when one is up the other should be down. I point this out to you to make you aware that when we don't have a correlated market, it means something is wrong. As traders you need to be aware of this and proceed with your eyes wide open.
Asia traded mostly higher with the exception of the Nikkei and Shanghai exchanges which traded fractionally lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
1. Fed Chairman Bernanke Speaks at 8:30 AM EST. This is major.
2. Final Manufacturing PMI is out at 9 AM EST. This is major.
3. ISM Manufacturing PMI is out at 10 AM EST. This is major.
4. Construction Spending m/m is out at 10 AM EST. This is major.
5. ISM Manufacturing Prices is out at 10 AM EST. This is major.
Currencies
Last Wednesday the Swiss Franc made it's move at around 9AM EST after the Unemployment Claims was released. We are using last Wednesday as that was the last full trading day for the US markets. The USD rose and the Swiss Franc fell. This was a shorting opportunity on the Swiss Franc. The key to capitalizing on these trades is to watch the USD movement. The USD rise only lent confirmation to the move. As a trader you could have netted 20-30 plus ticks on this trade.
Charts Courtesy of Trend Following Trades
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| Swiss Franc - 12/13 - 11/27/13 |
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| USD - 12/13 - 11/27/13 |
Bias
Last Wednesday we said our bias was to the upside as the Financials were correlated and Gold was trading higher. I'm using last Wednesday as that was the last full trading session. Friday was Black Friday with an abbreviated market session. As such on Friday the Dow closed down 11 points, the Nasdaq gained 15 and the S&P closed down by 1. Today we aren't dealing with a correlated markets, however our bias is to the upside. Why? The Bonds are trading lower which is a clear signal for an upside move in the markets, additionally the index futures are currently trading higher. Lastly after a long holiday weekend I think traders will be back in action today and move the markets higher. Could this change? Of Course. Remember anything can happen in a volatile market.
Last week in the US we celebrated our annual Thanksgiving Day holiday whereby most folks had a 4 day weekend. We witnessed the Nasdaq exceed the 4000 level which is something we haven't seen in a long time. Friday was Black Friday, however the markets (Dow and S&P) fell slightly. You typically know you're dealing with a true bull market when the markets advance on a Black Friday. If however you look at a chart of the Dow you would see that in the afternoon the Dow was advancing and I suspect if we did not have the abbreviated session that we had, the Dow would have advanced.
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| DJIA - 11/29/13 |
Given that was an abbreviated session, we'll withhold judgement until the markets tell us otherwise. Today we return to economic reports and we have Ben Bernanke speaking at 8:30 AM EST. No doubt the pundits and analysts will be listening to his talk to see if there are any market clues...
Many of my readers have been asking me to spell out the rules of Market Correlation. Recently Futures Magazine has elected to print a story on the subject matter and I must say I'm proud of the fact that they did as I'm Author of that article. I encourage all viewers to read that piece as it spells out the rules of market correlation and provides charts that show how it works in action. The article is entitled "How to Exploit and Profit from Market Correlation" and can be viewed at:
http://www.futuresmag.com/2013/08/01/how-to-exploit-and-profit-from-market-correlation
As a follow up to the first article on Market Correlation, I've produced a second segment on this subject matter and Futures Magazine has elected to publish it. It can be viewed at:
http://www.futuresmag.com/2013/08/16/how-to-exploit-and-profit-from-market-correlation?ref=hp
As readers are probably aware I don't trade equities. While we're on this discussion, let's define what is meant by a good earnings report. A company must exceed their prior quarter's earnings per share and must provide excellent forward guidance. Any falloff between earning per share or forward guidance will not bode well for the company's shares. This is one of the reasons I don't trade equities but prefer futures. There is no earnings reports with futures and we don't have to be concerned about lawsuits, scandals, malfeasance, etc.
Anytime the market isn't correlated it's giving you a clue that something isn't right and you should proceed with caution. Today our bias is to the upside. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see.
As I write this the crude markets are trading higher and the US Dollar is advancing. This is not normal. Think of it this way. If the stock market is trading lower, it's safe to assume that the crude market will follow suit and vice versa. Crude trades with the expectation that business activity is expanding. The barometer of which is the equities or stock market. If you view both the crude and index futures side by side you will notice this. Last Wednesday January crude dropped to a low of 91.77 a barrel and held. We'll have to monitor and see if crude either goes lower or holds at the present level. It would appear at the present time that crude has support at $92.28 a barrel and resistance at 93.59. This could change. All we need do is look at what happened last fall when crude was trading over $100.00 a barrel. We'll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump.
Future Challenges:
- Budget Battle - Forthcoming.
Crude oil is trading higher and the US Dollar is advancing. This is not normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 9 AM EST, 11 AM EST and 2 PM EST when the crude market closes. If crude makes major moves around those time frames, then this would suggest normal trending, if not it would suggest that something is not quite right. If you feel compelled to trade consider doing so after 10 AM when the economic reports are released and the markets give us better direction. As always watch and monitor your order flow as anything can happen in this market. This is why monitoring order flow in today's market is crucial. We as traders are faced with numerous challenges that we didn't have a few short years ago. High Frequency Trading is one of them. I'm not an advocate of scalping however in a market as volatile as this scalping is an alternative to trend trading.
Recently Published Articles:
http://www.barchart.com/headlines/story/12650453/are-the-markets-rewarding-poor-performance
http://www.traderplanet.com/commentaries/view/164874-trader-tips-the-case-for-fundamental-analysis/
Remember that without knowledge of order flow we as traders are risking our hard earned capital and the Smart Money will have no issue taking it from us. Regardless of whatever platform you use for trading purposes you need to make sure it's monitoring order flow. Sceeto does an excellent job at this. To fully capitalize on this newsletter it is important that the reader understand how the various market correlate. More on this in subsequent editions.
Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.
